Resurgent dollar storms emerging markets

BEFORE Donald Trump was elected the next president of the United States, American mainstream and international opinion was decidedly dead-set against the chance of him being elected, not to mention his purported governance style if elected. On election night, when it became increasingly clear that Hillary Clinton was losing to Trump, the atmosphere both on- and offline can perhaps be described as shockingly pessimistic over both America’s and the world’s prospects for the next four years at least.

Nevertheless, this somewhat somber mood over Trump’s impending “unique” leadership of the world’s largest superpower lasted barely a day or two. What followed was a perhaps not unprecedented, but definitely tremendous, surge in the US dollar’s exchange rate against many major and not so major currencies around the world. In my home country, Malaysia, the ringgit dropped almost to its lowest level in nearly two decades, since the days of the notorious Asian financial crisis. Many other Southeast Asian currencies reeled in a similar fate, prompting loud complaints from merchants and consumers alike in the region.

Trump appears to be a leadership character prone to deal-making and non-interference, but above all a business-friendly future American president. The business sectors in the US and other major economies could not fail to eventually smell this fresh gust of political wind, and many chose to repatriate plenty of “hot money” circulating around the world to America. The nature of capital is undoubtedly one of profit-seeking, with minimum risk and maximum return.

In recent years, the US economy has been saddled with low growth and thus low rates of return. Even then, Democrats who control the White House and briefly Congress were mainly of“progressive” mindsets. They reversed many of the previous business-friendly, regulation-light policies of the Republicans. For example, more stringent environmental protection was ushered in, together with better labor benefits and wider healthcare coverage. These “progressive” moves increased the domestic business and investment costs for many American merchants, so plenty of American capital chose to “flee” to so-called “emerging markets” where faster and more returns appeared to be promising.

Emerging markets admittedly exercise a lesser degree of regulation over business and investment activities. Environmental protection is scant, and both labor welfare and rights are not up to par with American standards. Healthcare coverage too is far fewer. These negative aspects of emerging markets are nevertheless welcomed by major capitalists and fund administrators, who continue to storm the emerging markets.

As their name suggests, however, the socio-economic structures of these emerging economies are nowhere near those of the US. Many American businesses had to expend large amounts of resources into research and development, and are thus more insistent upon stricter protection of intellectual property rights such as patents and copyrights. In many emerging markets, however, even awareness of intellectual property rights is yet to be properly introduced. Many openly fake goods, and substandard but cheaper services fill up the nooks and corners of these economies. As such, American businesses which choose to relocate some of their production methods or service modules to some of these emerging economies, do so at their own peril.

Then, too, the incidence of corruption is also phenomenal in some of these emergent markets. Many bureaucratic processes that could be done formally and efficiently in the US are constrained by such corrupt practices. Many American investors can thus exclaim about their “misfortune”. On the one hand, they are unable to effect change for the better in these emerging markets. On the other, the US is not only cocooned by a lackluster economy, but is often also constrained by many “unnecessary” (in the businessmen’s eyes) regulations. For example, although blessed with abundant reserves of oil and gas for self-sufficiency, the US restricts domestic exploitation and transportation of these natural resources, often in the name of preserving certain endangered or rare species.

But now with a reportedly business-friendly Trump poised to take over the White House, and in conjunction with a Republican-controlled US Congress, many of these business-unfriendly regulations could hopefully be overturned or reduced. Moreover, Trump has sworn to revive a flagging American economy, including rebuilding many of the country’s dilapidated infrastructure.

Smart American businesses of course see the light at the end of the tunnel. Their decision to return to partake in the rebuilding of America, preceded by a strong return flight of the American dollar, is thus understandable.

To many of these emerging economies, a resurgent US dollar negatively impacts on their raw material and manufactured goods exports. Their foreign debt, often denominated in US dollars, may also artificially rise. With the lessons of the Asian financial crisis still fresh in mind, it is high time many of these emerging economies clean up some of the not so salient aspects of their economic activities, so that they may still remain attractive investment destinations for foreign capital.